Information Uncertainty and Stock Returns

ABSTRACT

There is substantial evidence of short‐term stock price continuation, which the prior literature often attributes to investor
behavioral biases such as underreaction to new information. This paper investigates the role of information uncertainty in
price continuation anomalies and cross‐sectional variations in stock returns. If short‐term price continuation is due to investor
behavioral biases, we should observe greater price drift when there is greater information uncertainty. As a result, greater
information uncertainty should produce relatively higher expected returns following good news and relatively lower expected
returns following bad news. My evidence supports this hypothesis.